CEO Patrick Byrne

Dear Reader,
            On September 24 we open a new department: "Worldstock Socially Responsible Goods." This is the most exciting idea of my life. I relate here the (somewhat theoretical) tale behind it.

The connection between poverty and liquidation
           Recently we realized that Overstock is in a unique position to help the disadvantaged. To see this, one must first understand Overstock.com’s main business: we are an Internet liquidator. In practice, that means we operate within highly fractured supply channels of numerous, scattered vendors, scooping up products in lots too small to be moved efficiently through the mechanisms of mass retail, bringing them to our Salt Lake City warehouse, and pumping them out through the enormous pipe of our website to our customer base of 7 million monthly visitors. This marriage of scattered small-lot supply to mass demand is the essence of liquidation.

           In the spring of 2001 I visited India and Southeast Asia, where I lived as a youth in the 1980’s. Unlike my last visit to Cambodia, when civil war raged, this time I could rent a motorcycle and travel widely. Passing through villages, attending arranged meetings and stumbling into others, I encountered small producer associations composed of disadvantaged people. I met people who had lost legs and eyes to landmines yet who craft beautiful cutting boards, and others working as silversmiths or weavers of exquisite silks. I saw first-rate table settings and fine home décor products designed and produced by an organization that takes women who are homeless or otherwise living on the fringe, and trains them for more productive occupations.
           One afternoon I crashed my motorcycle on a dirt road in the north and lay tolerably banged up in the tropical sun, watching locals work their fields. A family took me to their village, and that night, sitting on the edge of a cot in the dark of their stilt-house, I thought about what I was seeing on my trip. I was reminded of a visit I made years ago to a Hanoi nail factory staffed largely by blind people, and the producer associations (often organized by Mennonite or Quaker NGO’s) I read of long-ago in my studies, composed of widows from Lebanon, Palestine, Peru, and elsewhere. I thought of institutions I have read of such as the Grameen Bank of Bangladesh, a micro-credit bank making tiny loans to village entrepreneurs (often female) who use the loans to buy small capital goods (such as sewing machines) to support themselves. I began to speculate upon the enormous problems such producers face, not only from the obvious human perspective but from the perspective of economics and business that I had lacked as a young man. The common feature these people share appeared to me: these people are not charity cases, they are people who want work, self-respect, the ability to earn a living, to provide for their families and to contribute to their communities. But beyond the challenges they face, such as those presented by their physical situation and their lack of capital, a broader difficulty confronts them all: their output comes into the world through highly fractured supply channels of numerous, scattered producers, in lots too small to be moved efficiently through the mechanisms of mass retail….
           Finally, it was too obvious even for me to miss. At a theoretical level the central problems of liquidation and of artisan production are indistinguishable: how does one efficiently marry scattered small-lot production of highly varied products to mass demand? And by one of those weird coincidences that seem to govern my life, I had spent the last 18 months building the most perfect machine ever created to do just that: Overstock.com.

Principles by which we pursue Socially Responsible Goods
           My background is both in business and academia. I earned a doctorate in philosophy at Stanford, but took forays into jurisprudence, development economics, and philosophical issues related to poverty. In addition, starting in 1983 I spent fair chunks of my life in China, Thailand, Cambodia, Vietnam, and the Arab Gulf and Levant. In the course of these studies and travels, I grew skeptical about the effects of the aid and advice the developed world has been offering the world’s poor for the last 50 years. This skepticism was nurtured by my studies under the legendary development economist Partha Dasgupta and, through him, the works of Nobel laureates Ken Arrow and Amartya Sen. My colleague and our Executive Vice President, Kevin Lane, also has an academic background (a doctorate in political theory from Harvard), and spent 10 years in China and Taiwan. In sum, we have seen destitution from every angle, and are familiar with the interplay of poverty, politics, markets, and NGOs (Non-Governmental Organizations). Together, we quickly saw that Overstock was uniquely positioned to change things.
           Immediately upon my return we set to turning Overstock.com to this purpose and discovered that fair-trade is a highly politicized issue. For example: How may an American firm negotiate fairly with a supplier from a less developed country in a context of asymmetric power, information, and capital? Does shoring up traditional cultures reinforce patriarchal suppression of females? Should trade be conducted with women’s groups in Afghanistan, or does that provide de facto support for the Taliban regime? Within the fair trade movement there is disagreement on the answers to such questions.
           As a place to start, one obvious principle is that socially responsible goods cannot be produced by children laboring in formal settings. The essence of trade is that free and rational agents conduct it, and children are not free and rational agents in an ethical sense. Children working in factories cannot truly choose the condition of their employment, and therefore their output is tainted (though children might legitimately help their parents in informal, cottage industry settings, as long as the work is limited to a few hours per day, and they also go to school). Other than that, what can we say? I think of the goods with which I hope to build this category, those whose purchase would support women, or disabled people, or traditional artisans such as Native Americans, or other disadvantaged people, and goods produced through micro-credit, and goods whose production or consumption is accomplished in an environmentally sound manner. I saw that the common denominator of these products is sustainability. Three principles follow from this: we will support businesses that do not use up workers or cultures or natural resources.

1. Economic sustainability
           Goods may be socially responsible by offering sustainable livelihoods to disadvantaged people. These include those who have suffered from war, such as land-mine victims and widows, aboriginals and traditional peoples bypassed by overly-concentrated modernization in the developing world, and women who have fallen upon hard times from which no avenues of exit exist. Through trade, we seek to provide stable employment from which they can build a life in the long term, not just in the short term, and that does not "use up" the worker over just a few years. By purchasing the output of such people, our customers and we are bypassing a top-heavy, handout approach to poverty, opting instead for an organic, bottom-up approach that nurtures the roots without waiting for benefits to trickle-down from the top.

2. Cultural sustainability
           Development often causes massive cultural dislocations. For example, efforts to stimulate job-creation in cities can lead to ever-higher pools of urban unemployment as stimulatory effects are washed out by waves of (male) artisans forsaking traditional crafts for urban jobs. By purchasing the output of artisans working in traditional settings, our aim is to work with and shore up worthy traditional institutions while lessening the cultural dislocations that often accompany development.

3. Environmental sustainability
           Goods may contribute to environmental sustainability. For example, there are efforts to save the Brazilian rain forest by generating replenishable products from it rather than burning it for pasture. Moreover, there are goods which substitute for commercial goods but which are produced in non-industrial, eco-friendly ways. By purchasing such alternative goods our customers tread lightly upon the earth.

            Corporations are often accused of disingenuousness about the responsibility they claim to practice, and therefore suspicion haunts any firm that makes claims such as mine. Therefore, along with the preceding principles that govern what products we acquire, we are committed to three more that govern our pricing, negotiations, and disclosure.

4. Maximum of 5% Profit Pricing
           Some retailers buy goods that contribute to economic, cultural, or environmental sustainability, but mark them up 100%, 200%, even 300% or more, so that only a slim fraction of the sales proceeds actually gets to producers. We wish to price our socially responsible goods as low as possible so that we may grow this department quickly and spread the model to as many people as possible. The goods in this department are priced to cover our costs while leaving no more than a 5% net profit for us. "Our cost" refers to what we pay the producers plus with what it costs us to warehouse, market, and ship the products.

           We will never lay high mark-ups on these products since my dream is to support as many disadvantaged people as possible by selling as much of these products as I can. A small profit is necessary if we are going to be able to buy the ever-larger inventories that growth will require. So while the answer to the question, "What percentage of the price actually goes to the producers?" varies product by product, the bottom-line is always the same: as much as is possible while still allowing Overstock to cover no more than its costs + 5%. For pricing certification please click here.

5. Fair negotiation
            I do not pretend to be a nice guy. In fact, I am a rapacious capitalist: as you read this I am out there sticking it to some other businessman in distress, and I’m going to do it again as soon as I get a chance. That is how we sell TV’s, jewelry, and computers at the prices we do. This approach is inappropriate for SRG products. When disparities in wealth, options, and information between two parties exceed a certain level, negotiations between them are spurious. I do not intend to chisel Peruvian widows and lowball Cambodian landmine survivors in order to "get the goods," and I suspect socially aware consumers do not want me to do that on their behalf.

           Therefore, the principle I have adopted for this department is simple: suppliers can tell me (within reason) what they want me to pay for their products. I will not negotiate against them, but I will explain our 5% Profit Pricing, and remind them that if they charge me too much I will not be able to sell their products or place reorders: lower prices to me will create higher volume for them. In effect, the buying behavior of our customers in this Worldstock SRG department will tell me if and how hard they want me to push back on producers. I know no fairer system.

6. Transparency
           Principled disagreement exists among fair trade proponents. Many of these products are purchased from development organizations, NGOs, non-profits and micro-credit banks which organize producer associations and, in some cases (e.g., landmine survivors), train producer-artisans. There are those who think that socially responsible goods should be acquired only through such agencies to assure credibility. Others claim that limiting purchases to such agencies perpetuates a mind-set of dependency that says, "an agency, not individual initiative, offers the only way to get ahead."

            For example, imagine that in my own travels I find (as I have) a small workshop in a village in the Bekka Valley of eastern Lebanon, where a few women work together to create exquisite shawls and capes. Their products do not carry the imprimatur of any UN organization or development agency, but in my view their wares are appropriate for this category. Should I forego the shawls because they lack an NGO’s certification, or should I trade in them to reward these women’s initiative?
           My answer to this dilemma is simple: transparency. We buy socially responsible products from reputable fair trade importers, NGOs, micro-credit facilities, and similar humanitarian organizations, but also directly from artisans. We are transparent about our sources for these products. Therefore, a customer might trust m claim that buying a given shawl contributes to the well-being of a village in eastern Lebanon. On the other hand, she may only buy products that we acquire through formal channels like the Quakers (on the fair assumption that the Quakers are not running a sweatshop in Peru), or Rehab Craft Cambodia (a New Zealand-funded organization building a self-sufficient and community business channel for Cambodians with disabilities). By providing sourcing information in our product descriptions we eliminate the dilemma concerning what constitutes social responsibility: we are transparent and honest, then leave it to the customer to decide.

Conclusion
           Overstock.com created its Worldstock Socially Responsible Goods department because we recognized that the infrastructure we had developed to compete in the liquidation market was suited to a more important market. Around the planet there are talented people who could feed their families, vaccinate their babies, and send their children to school if we in the developed nations purchased the unique and beautiful things they know how to make. Around the world today there are scores of humanitarian groups working with artisans to create handmade products that could be sold with pride in the developed world. And around this country there are those who wish to buy such products when their quality is good, when the purchase is convenient, and when doing so will make life better for another family. Yet, artisans have trouble reaching their natural market because of poverty, poor information and infrastructure, and primarily, the inherent disadvantages that small-lot producers face in an industrial age.

            Overstock.com has created a new business that emphasizes sustainability, fairness, and transparency. By developing this department and by pricing products in it with only a small mark-up of cost + 5%, we can extend the benefits of this system to as many disadvantaged people as possible. The sale of these products provides a connection that makes it easy for our customers to make a difference in the world, and empowers artisans to achieve the dreams they have for themselves and for their families.

Sincerely,

Patrick M. Byrne, CEO

PS Please write me at Patrick@Overstock.com with any questions or feedback regarding this department, or ideas for groups we should contact to buy from, or suggestions on how we can promote these goods.